Whole vs Term Life Insurance: What’s better?

When our family expanded with two children, I started thinking about what kind of life insurance i needed to purchase.  But the truth is, i did not know how to buy life insurance wisely, or the different types of life insurance policies out there.

The benefits of life insurance are undisputed, but i needed to know what would be best for my family.  That is why i did a little research about what to look for when buying life insurance, and the types of life insurance policies out there. 

Most people choose not to attach a great deal of importance to acquiring a life insurance policy as is evident from the Statistics. Over 40 % of Americans are living without any kind of life insurance coverage at all.

However, you could pass away at any unfortunate moment without having ensured the well- being and safety of your dependants.  Life insurance can be a lifeline for your dependants during the devastation of losing a loved one, compounded by huge bills of mortgage, funeral charges etc.

Do you need coverage for a certain period of time ( term life) or whole life coverage?

  • Determine how much coverage you need.
  • Would you like mortgage coverage in case in death?
  • Term life insurance simply put, provides insurance cover for a limited (term) period of time. After the term as a per contract expires, the policy has to be renegotiated. 
  • With term life insurance, premiums are based on your general health and medical history.
  • The premium will most likely increase at the renegotiation as the policy holder is older and more susceptible to diseases or death than they were before the first policy.
  • Many people use term life insurance policy as a way to cover certain costs like, paying off a mortgage, funeral costs, paying off consumer debt,  when they pass away.
  • A one year term life insurance policy is the simplest form of term life insurance. Term life insurance is a protective instrument and not an investment. 
  • The biggest challenge with term life insurance policy is its limited coverage. Because the future is unpredictable, the policy buyers have a hard time deciding how long they need the policy to make financial sense.  
  • After expiration of the policy,  renewal of the policy comes at an increased cost because the policyholder is now older. The charges may increase along the way, yet there is nothing you can claim from your insurer.

A term life insurance policy does not have cash value. One can not cash it our or ask for their money back. Neither can you borrow money against the policy.

What happens if i outlive my term life insurance?

  • In case of death during the term, the policy is paid out the your chosen person. If you don’t die during at the end of the term, the policy terminates, the premium money is returned to you completely tax free. It is not considered income, but a refund of premiums.  
  • Some companies like Foresters Financial have options to elect to convert it to whole life during the last five years of the policy and I’m sure others offers that as well.
  • Whole life insurance is a permanent insurance policy, it gives guaranteed protection for the benefactors, that lasts a lifetime. With whole life insurance, the policy earns guaranteed cash value, which you can use however you want, depending on where you live.
  • With whole life insurance, premium payments are divided into cash value and the death benefits. With time death benefits dwindle, while cash value side of the equation swells up to the point that in the end the policy is composed of the cash value. Death benefits are received by benefactors  in the event of death of the policy holder.
  • Some companies also pay out a very good dividend. For example Northwestern mutual raised their dividend to whole life policy owners to 5% this year. You can use the cash you put into it and accumulate anytime you want it tax free.
  • Ask your life insurance agent for the different whole life insurance  rates chart, so you get a picture.  
  • The premium payments do not change with your age or health conditions, it does not expire.
  • Thanks to its “cash value” component, it serves a dual purpose of insurance and an investment or saving.
  • It can be extremely useful in avoiding inheritance tax so that your beneficiaries receive the full inheritance.
  • The premium payments are more expensive than that of term life insurance. Many people end up dropping out a few years down the road.
  • Whole life insurance policies are usually known to be quite complicated requiring thorough understanding of the subtle differences between policies, a good relationship with the insurance agent, and in depth research on the subject.  
  • One of the biggest selling points is the tax advantages. But unless your net worth is really high, i.e upwards of 10m the math might not work for you.
  • The insurance company will cancel your policy, give you cash value of your policy.  This will all depend on the amount of money you have paid. 
  • Alternatively, some companies will provide you with a paid up term insurance policy.

Questions to ask your insurance agent before buying life insurance

There are so many life insurance terminologies and definitions. Contact certified Life insurance agent will give you insurance tips and advice that best suits your needs. For some people Term life may be the best option, while it may not be suitable for others.  Here some of the important things to ask your insurance agent.

Acquire the details of the business including size assets ratings, financial records, state licenses to ascertain the stability and credibility of the insurer.

What are the different types of Whole life insurance available?

These are some of the examples. Universal insurance & Index Universal life. Universal life insurance is sometimes called adjustable life insurance, because it is flexible.  If something unpredictable happens to you like loss of income, you can stop your premiums or alternatively lower your payment using your cash value.

  • Insurance companies use several formulas to determine what might be the perfect policy for your specific needs. But understanding how they get to the figure is important.
  • Is it based on an analysis factoring in your specific information such as the mortgages you need to pay off or the amount of money you want left behind for your family?
  • The end goal from consumer’s point of view is to get the maximum benefits, long term and short, for the minimum payments.  Doing your homework when investing in a life insurance policy is the key to making the right decision.
  • Does the insurer forgive the premium payments of a life insurance policy if the policy holder has developed a serious illness or disability?

Can you get accelerated death benefit?

  • This  allows one to withdraw the death benefit as soon as he or she is diagnosed with a terminal illness and has less than 12 months of time left. This allows them to pay for their expenses and live whatever little time they have without worrying about the finances.
  • Allows the policy holder to purchase coverage at designated future dates or life events without the need to undergo medical assessments, also known as future insurability. This provides a greater flexibility to adapt to evolving circumstances.
  • Allows the policy holder to purchase term life insurance for the spouse or child less than 26 years of age. This serves as a more affordable option for people who can’t buy separate life insurances.
  • Typically a feature of a term life insurance policy, this will pay off your mortgage in the event of your death.
  • Post the death of a policy holder, the beneficiaries may require financial planning assistance. Some of the policies do provide financial and legal services to the beneficiaries if required.

There you have it, a few things i learned while buying life insurance.  Share with us in the comments sections how and what kind of life insurance policy you settled for.

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